External stakeholders are part of business stakeholders who are outside the organization. They do not have ownership or work relations in the company. In other words, they are those who have an interest in the company besides the shareholders and employees of the company.
Like internal stakeholders, they have influences on the company. And at the same time, company decisions and actions also affect them.
We also refer to them as outside stakeholders.
Types of external stakeholders
Business stakeholders consist of two main groups: internal and external stakeholders. Internal stakeholders consist of shareholders and employees. Employees can be corporate executives, the board of directors, or non-managerial employees.
Meanwhile, external stakeholders comprise of:
- Creditor or lender
- Local community
They are an external force that influences the company’s success. Not only that, but the company’s presence can also affect them.
How external stakeholders affect a business
Each stakeholder represents different interests. In some cases, their interests often conflict. That could harm and raise a dilemma in decision making. A company is a success if it can manage and please them in optimal and profitable ways.
Customers are the most strategic stakeholders. The company exists because it wants to satisfy them through products or services.
They become a source of money for the company. When success in fulfilling their needs, money flows to the company, not only in the short-term but also long term. The company can use the money for paying employees, buying capital assets, and distributing it as dividends.
To be successful, companies must create value for their customers. By doing so, they can make a profit. They can choose some alternatives as their competitive strategy.
Porter, through his generic strategies, offers interesting ideas about the company’s competitive strategy. He divides strategies into two major groups: cost leadership and differentiation. Both of them tell you about how the company can make a profit.
Cost leadership puts forward a lower cost structure than the industry average. The lower cost structure allows a company to generate higher profits, even though its revenue is the same as the industry average.
Meanwhile, differentiation emphasizes on making unique products. The uniqueness makes customers willing to pay a premium price.
The company can execute both strategies in two different markets. Broad market if the company competes in the primary market, or niche market, where the company focuses on the specific needs of customers in the market.
But success is not an easy matter. In some markets, customers have a variety of alternative products and services. When dissatisfied with a product, they will switch to alternatives. When satisfied, they will choose to continue to buy products from the same company.
Consumer choice depends on what they will get from a product relative to what price they have to pay. When they buy, money flows to the company.
The money will continue to flow to the company when they like the product. Products provide satisfaction values that are equal to or higher than the price they pay.
Suppliers are stakeholders who provide input to the company. Companies need a variety of raw materials, equipment, money, and machinery to operate. Also, in broad scope, they need labor.
Please note, in broad scope, suppliers could cover creditors, shareholders, and the public. They are a supplier of production factors. Creditors and shareholders supply money to the company. Meanwhile, the community provides labor. But, in this classification, we exclude them from the definition of suppliers.
Reliable suppliers allow companies to reduce uncertainty in technical or production operations. They can have a direct effect on company efficiency. The input prices they provide contribute to the company’s cost structure.
Not only that, but they also have an indirect effect on their ability to attract customers. The price and quality of inputs determine the price and quality of the output. When companies get low input prices, they could set low selling prices. Likewise, high-quality input is a prerequisite for high-quality products or services. For example, the quality of gems depends on the rocks that the company processes.
A union consists of a group of organized workers who act in the common interest. Together, their bargaining power towards the company becomes stronger. They can force companies not to engage in discriminatory practices or pay unreasonable wages.
For example, unions carry out mass strikes to demand wage increases. It stops and interrupts the production process. Output falls. Also, consumers might not get their items on time because of disrupted shipments.
Of course, the strike was detrimental to both parties. Striking workers do not get hourly wages. Likewise, companies also do not make money from selling goods.
Creditors supply capital for the company. They might be banks, finance companies, or debt investors. The company borrows money from them and as compensation has to repay the loan principal plus interest.
Unlike stocks, debt has a consequence of routine cash outflows, i.e., interest payments. The higher the debt (leverage), the greater the cash outflows. High leverage limits the company’s capacity to owe. When a company doesn’t pay back the interest or principal, they can force the company to go bankrupt.
Public or local community
The public and local communities also have an interest in the company’s performance. The business activity contributes to employment, housing, income and economic well-being of the local community.
The local community is a prospective source of labor supply for companies. Skilled and highly educated local labor contributes to increasing the company’s productivity and competitiveness.
Special interest group
Non-governmental organizations influence companies related to their various aspirations. For example, green campaigns force companies to implement environmentally friendly practices in their operations.
If the companies don’t do it, it can harm their reputation. Non-governmental organizations can voice boycotts of their products. Of course, when people follow such boycotts, it can destroy the sale of products or services. And, if that happens, the company cannot make money.
Government policy has a large influence on the market and the company’s operating environment. Take an extreme case of a command economy. In such an economic system, establishing a private company and making profits is impossible. The state controls all economic activities. The economic goal is social welfare, not making a profit.
In contrast, in a more open economy, government influence on business can be through taxes and regulations. The government collects taxes from companies. And, for businesses, it represents costs. The higher the tax, the smaller the profits and money the company will get.
Furthermore, through regulations, the government influences business activities and competitive landscape. The government releases antitrust laws to ensure fair competition between companies.
Regulations can also affect company operations and costs. Companies must follow product quality standards. They must also follow regulations on worker health and worker safety standards. Not only that, but the rules also govern how they should manage waste production.